With
all the caveats in the preceding post, let’s look at a series of charts which I’ve compiled from
the FYE 2016 annual reports for 7 Qatari banks.Recall there are 3 banks (AlAhli, AlKhaliji, and IBQ that don’t provide
full geographical analysis of assets and liabilities) and one bank Development
Bank of Qatar that has a relatively miniscule positive NFA position and so I’m
not inclined to spend time analyzing it.

Before we begin, one important
note.I will be comparing consolidated
data as of 31 December 2016 to QCB data as of that same date in what
followsKeep in mind that since 31
December 2016, QCB data shows a QAR 79 billion reduction in TFL (USD 21.7
billion), and a QAR 41 billion (USD 11 billion) reduction in NFA.For a net decrease in the negative NFA
position from USD 47.7 billion to USD 36.6 billion equivalent.

Qatar
Banks NFA 31 Dec 16

Consolidated
Financials- QAR Billions

BANKS

TFA

TFL

NFA

NFA-USD

QNB

278

355

-77

-$21

QIB

25

37

-12

-$3

CBQ

43

53

-10

-$3

MAR

16

13

3

$1

DOHA

10

9

1

$0

BAR

11

5

6

$2

QIIB

2

6

-4

-$1

TOTAL

386

478

-92

-$25

MAR = Masraf al Rayan and BAR = Barwa Bank.

As per the QCB’s statistics, the NFA position was a negative USD 47.7
billion equivalent at 31 December 2016.Using consolidated financials, the NFA position was negative USD 25
billion at that same date.While this is
based on a sample instead of the population, it’s unlikely that the remaining banks
have a negative net foreign position anywhere approaching USD 23 billion.As per QCB data, the QDB has a miniscule though
positive NFA exposure equivalent to some USD 84 million.Because total liabilities (foreign and
domestic) of the first three banks equal QAR 112 billion (some USD 31 billion).
It’s highly unlikely that they have foreign liabilities equal to 74% of total
liabilities.And also if they have such
FL, they probably have some amount of FA to offset them.

On that basis and subject to the caveat
about the free transfer of assets between overseas entities and Qatar,
particularly for subsidiaries, it certainly looks like the Qatar banks
aggregate position (onshore and offshore) is even more manageable.

One can also look at other measures of this
exposure. If we look only at banks with negative NFA, they owe some QAR 102
billion (USD 28 billion).

If we look at
a base worst case (because we lack data on three banks), consolidated financial
derived TFL are QAR 478 billion (USD 131 billion) which is higher than QCB’s
TFL of QAR 447 billion (USD 123 billion).

But what is the exposure to Other GCC countries, which would include
the GCC 3?

Qatar
Banks NFA31 Dec 16

With
Other GCC States

Consolidated
Financials - QAR Billions

BANKS

TFA

TFL

NFA

NFA-USD

QNB

32

24

8

$2

QIB

9

28

-19

-$5

CBQ

10

14

-4

-$1

MAR

3

7

-4

-$1

DOHA

10

9

1

$0

BAR

5

2

4

$1

QIIB

1

5

-4

-$1

TOTAL

71

89

-18

-$5

NFA exposure to Other GCC is QAR 18 billion (USD 4.9 billion). But note that
not all banks have negative NFA positions.

As argued more than once in earlier posts, it’s more proper to look only
at those banks with negative NFA positions.In that case, the exposure is QAR 31 billion or USD 8.5 billion.Still manageable.

The total TFL to Other GCC (some QAR 89
billion equivalent to USD 24.5 billion) is only 19% of the QAR 478 billion in
TFL.

The GOQ shouldn’t have a
problem providing either of these amounts and by some reports has already
transferred this amount to Qatari banks.

The above is based on a sample of 7 banks because the remaining
banks—AlAhli, AlKhaliji, IBQ and DBQ—don’t provide the sufficient information
to include them. While we are missing detailed data for four banks, it’s
unlikely that their positions will dramatically change these amounts.

AlKhaliji has disclosed subsidiaries with
gross assets of QAR 8.9 billion (USD 2.4 billion) primarily AlKhaliji France (AKF) which appears to operate primarily through its branches in the UAE. On the
asset side AlKhaliji reports some QAR 9.9 billion in assets with OGCC.We don’t know the total FL to OGCC. AlKhaliji shows FX assets of some QAR 3.5 billion and FX liabilities of QAR 3.3 billion in its currency risk note.

AlAhli and IBQ
do not appear to have foreign branches or operating subsidiaries overseas. IBQ
reports some QAR 1.4 billion in OGCC FA and a negative net FX position of QAR
4.4 billion in AED in the banking book so a quesstimate of their FL position
vis-à-vis the OGCC is some QAR 5.8 billion.That assumes no significant non AED funding from the OGCC.

AlAhli reports some QAR 1.1 billion in FA
with OGCC.It does not report any
significant FX position in AED.Again
assuming no significant non AED funding from OGCC a good guesstimate is that OGCC FL are
QAR 1.4 billion.

Qatar Development
Bank, the missing fourth bank, doesn’t release financials but from the QCB data
we can see that it is funded primarily with equity and has a positive NFA of
some USD 84 million equivalent.

If we adjust the base worst case scenario for the
above QAR 17.1 billion in estimated FL in the worst case increases by USD 4.7
billion equivalent to USD 29.2 billion. Reasonable increases in the QAR 17.1 billion amount (say in the range of 2 -4) would still leave the base worst case at a comfortable level.

Other GCC includes Kuwait and Oman. These states may be less “enthusiastic”
about withdrawing their funding from Qatar.That being said, Oman and Kuwait are unlikely to have as large positions
with Qatar as the GCC 3.

What this
means is that for the GCC 3+1’s efforts to be successful they will need to
persuade other foreign creditors and depositors to withdraw funds from
Qatar.That seems a difficult row to
hoe.

But there are some strains on the individual bank level.For example, QIB has OGCC-related TFL (QAR
28 billion) greater than QNB (QAR 24 billion) a bank which is roughly 5 times
its size.

Qatar
Banks NFA 31 Dec 16

Other
GCC FA & FL to TFA & TFL

BANKS

GFA/TFA

GFL/TFL

QNB

12%

7%

QIB

38%

76%

CBQ

23%

27%

MAR

20%

52%

DOHA

94%

95%

BAR

49%

32%

QIIB

36%

71%

TOTAL

18%

18%

Looking solely
at foreign assets and foreign funding, four banks have ratios that cause concern:QIB, QIIB, MAR, and Doha, though on an absolute
basis the GOQ could easily provide replacement funding.

Note the potential
exposure of QIB, Doha, Barwa and QIIB to asset concentrations in Other GCC
states.If the boycott continues, this
business may be “lost”.If the GCC 3
takes steps to restrict these banks’ access to their assets in these countries,
including the proceeds of the realization of those assets, by way of additional
boycott steps, then much larger but still manageable GOQ support would be
required.

QNB on the other hand is
relatively well positioned.

But this
chart measures OGCC FA and FL in terms of total FA and FL.That tells us how important OGCC business is
to their foreign activities.But what
about the importance to their total business both foreign and domestic?

Qatar
Banks NFA Position 31 Dec 16

Other
GCC FA and FL to TA & TL

BANKS

TA

TL

OGCC/TA

OGCC/TL

QNB

720

621

4%

4%

QIB

140

120

7%

24%

CBQ

130

130

8%

11%

MAR

92

79

4%

9%

DOHA

90

77

11%

11%

BAR

46

39

12%

4%

QIIB

43

36

2%

12%

TOTAL

1,260

1,102

6%

8%

QIB again
“sticks” out.Looking at details in
their FYE 2016 annual report, their liability concentration in Other GCC is
driven by customer deposits.80% of
QIB’s QAR 28 billion in Other GCC liabilities is from “equity of unrestricted
account holders”.There isn’t a
breakdown by maturity of QIB’s TFL.If
we assume these track its other customer deposits of this nature, we can use
the maturity note on page 39 of their FYE 2016 report.According to that note, some 70% of EUAH
mature within 3 months with an additional 14% between 3 and 6 months.Assuming these maturity patterns have carried
forward, then QIB could be facing some serious withdrawals.

At this point I’ve thrown a lot of data at
you.It’s time to organize that data
into key takeaways and to provide some scenario analysis of the exposure of
Qatari banks to foreign liabilities and as well of the exposure of Qatar’s
Central Bank to that exposure if the banks are incapable of dealing with it
themselves.That will be the topic of a
future post.

As
mentioned in the previous post, while we can use Qatar Central Bank reported
data to get a more comprehensive understanding of Qatari banks’ net foreign
asset (NFA) exposure than that contained in the QCB’s single NFA “number”, we
still need more granular information.

An allocation of the banking sector’s risk by geographical region to identify
potential concentrations of exposure.In
this case, are FA and FL primarily to other GCC states? Or states likely to be
influenced by them?

A disaggregation
of that data into FA and FL position of individual Qatari banks. As argued
earlier, we should be primarily focused on those banks with negative NFA
positions, unless we assume that those banks with positive NFA positions will
make their foreign assets available to banks with negative position.As well to properly assess FA exposure, we need
to know if a bank with overall positive NFA has negative NFA with other GCC
states.

We can use the geographic allocation of
assets and liabilities provided in the risk management notes in the consolidated
financial statements of individual Qatari banks to get closer to an
answer, but admittedly this is an imperfect exercise.

Banks only provide this information as of fiscal year end so it quickly becomes
stale. Basel Pillar 3 disclosures would provide an additional data point as of
June.But Qatari banks do not publish
Basel Pillar 3 disclosures. Presumably the QCB does not require them for some
no doubt excellent reason, though AA presently cannot imagine what on earth
that might be.

More importantly, consolidated financials include the assets
and liabilities of subsidiaries and thus overstate the strictly legal exposure of
a bank.It’s important to note that
consolidated financials are an accounting construct not a legal entity. Subsidiaries
are treated as though they are directly part of a fictional consolidated
“entity” that has direct ownership rights in the subsidiaries’ assets and is
directly liable for the subsidiaries’ liabilities. That’s not the case. The only legal entities
are the parent and its subsidiaries.There is no legal consolidated entity.

The parent of a consolidated
entity owns shares in its subsidiaries. Therefore, because it is an equity
holder, its rights in its subsidiaries assets are subordinate to creditors of
those subsidiaries. There are also almost certainly additional legal or other restrictions
on the parent’s right to access its subsidiaries’ assets.Likewise the parent is not responsible for
the subsidiaries’ debts, unless it has provided a guarantee.

So if we use consolidated financial data we
are including FA that are not available to the parent as well as FL which are
not the obligations of the parent.

On
the other hand banking groups have an incentive to maintain their subsidiaries’
health not only to protect their equity investment but also their reputation. Distress
at a subsidiary may be taken as a sign of poor controls, financial distress at
the parent, etc. and lead to creditors rethinking their relationship with the
parent. And while FA are not legally
available to the parent, it is possible that a subsidiary could place a deposit
with its parent instead of with another bank.Transactions of this nature would be legally constrained by legal
lending limits, particularly those to related parties.

On a positive note, consolidated financials
provide another way to look at the NFA position of individual banks.

Ideally to avoid the issues with use of
consolidated financials, we would use parent-only financials.However, not much more than balance sheets
and income statements for the parent-only are provided.There are no comparable risk management
disclosures.

So what is to be done?

Let’s look a bit closer at the consolidated process. When a consolidated statement is prepared, the
assets and liabilities of the subsidiary are added to that of the parent
category by category after eliminating any transactions between parent and
subsidiary. Note the latter are included in the parent-only and
subsidiary-only financial statements.

As well, the carrying amount of the
investment on the parent-only balance sheet is eliminated, based on the accounting
concept that the difference between the subsidiary’s assets and liabilities
equals its total equity, i.e., paid in capital, surplus, reserves, and retained
earnings.

Where the subsidiary publishes
its own standalone financials, information in those financials coupled with
information in the parent’s financials can be used to estimate the
consolidating entries and back them out. That information can also help in adjusting
the geographical allocation of assets in the risk management note.That’s important when we want to get a more
accurate picture of the parent’s exposure to regions on a gross basis, i.e., FA
and FL not just the NFA position.

Why is
that?

Because the carrying value of the
equity in the foreign subsidiary on the parent-only balance sheet is carried at
a value that is probably close to the difference between the assets and
liabilities of the subsidiary included in the consolidated financials.Differences could result from income
reflected in the subsidiary’s books but not reflected in the parent’s
(parent-only) financials.

As the above discussion indicates,
de-consolidation can be a rather extensive process made even more difficult by
the absence of information.Also AA is
not inclined to undertake this exercise, if it is of limited use.

To that
point, the central goal of this analysis is to determine if the banks and/or
the GOC have the resources to successfully “handle” their NFA positions.For that we don’t need the exact NFA
position, but an approximation. For
example, if the NFA position is equivalent to negative US 1 trillion or so, we
really don’t need more precision to come to the conclusion that the GOC is
unlikely to be able to handle the position.If on the other hand it’s negative USD 100 billion, we can be reasonably
certain the GOC has sufficient resources to support its banks, though this
amount might impose some financial strain.

As a first step in this “exercise”, let’s
determine if the differences between Qatari banks’ consolidated and parent-only
financials are significant enough to warrant at attempt to de-consolidate. The chart below compares each bank’s
consolidated financials to its parent-only financials. Sadly, the banks whose names in red boldface
do not provide a full geographical analysis of assets and liabilities which makes it frustrates compiling an accurate picture of their individual FA and FL as well as the overall
total.

Total
Assets of Qatar Banks 31 Dec 2016

Billions
of QAR or USD

Banks

Consolid

Parent

Diff

USD

QNB

720

588

132

$36

QIB

140

135

5

$1

CBQ

130

115

16

$4

MAR

92

86

6

$2

DOHA

90

90

0

$0

AL
KHALIJI

61

55

6

$2

BARWA

46

46

0

$0

QIIB

43

43

0

$0

AL AHLI

38

38

0

$0

IBQ

36

36

0

$0

TOTAL

1,395

1,231

164

$45

Total
Liabilities of Qatar Banks 31 Dec 2016

Billions
of QAR or USD

Banks

Consolid

Parent

Diff

USD

QNB

649

513

136

$37

QIB

120

116

4

$1

CBQ

111

95

16

$5

MAR

79

73

5

$1

DOHA

77

77

0

$0

AL
KHALIJI

54

48

6

$2

BARWA

39

39

0

$0

QIIB

36

36

0

$0

AL AHLI

33

33

0

$0

IBQ

31

31

0

$0

TOTAL

1,228

1,061

167

$46

For 8 of the banks above, there are no differences between consolidated and
parent-only financials (5 banks) and relatively minimal differences for 3
banks, suggesting that we can use their geographical allocation of assets and
liabilities are a close approximation to their parent-only financials. In
aggregate the difference is equivalent to some USD 4.7 billion.

Two banks—CBQ and QNB—require a further
look.And look we will a bit later.

But first before we dive deeper into the
analysis, let’s compare QCB data as of the 31 December 2016 QSR(Tables 22 and 23) to aggregate parent-only data compiled from
individual bank FYE audited financial reports by OCD AA.

Why?To see how close the two numbers are.

Do the parent-only financials suggest there are additional liabilities
or assets, including FA and FL that are not included in the QCB NFA
statistic?

In presenting its data QCB
provides separate aggregates for Traditional Banks, Islamic Banks, and
Specialist Banks (QDB).That makes analysis
easier and we can spot if there are anomalies by bank type. Since QDB does not publish financials and is a سمكة صغيرةI'm not including them in the analysis. Of course, differences are to be
expected.The QCB would likely take a
more conservative view of the value of intangibles, unrealized earnings from
subsidiaries, etc.The charts below
summarize what we see.

Qatar
Banking Sector Total Assets

QAR
Billions

Parent

QCB

Diff

Traditional

921

899

22

Islamic

309

323

-14

Total

1,231

1,222

9

Qatar
Banking Sector Total Assets

QAR
Billions

Consol

QCB

Diff

Traditional

1,075

899

176

Islamic

320

323

-3

Total

1,395

1,222

173

The difference between QCB and the AA-compiled parent-only data arises primarily
from differences in loans.QCB shows QAR
12 billion more in loans for Islamic banks and QAR billion 13 less
in loans for Traditional Banks compared to the data I compiled. Note this also
reflects adjustments by AA for apparent differences in definitions of asset and
liability categories by QCB and the individual bank’s financial reports.For example, with Traditional Banks, the QAR
14 billion in the net of DFBs and Financing Assets.

If you decide to pursue the interesting
exercise of comparing the two sets of data in detail, a few pointers.First, as noted above, QCB appears to have
definitions of DTB, DFB, and Financing Assets that differ from those used in
the individual bank financials so you will see for example, differences in DTB
category and loans which AA netted.Second,
there are some QAR 24 billion of debt qualifying as Tier 1 capital that QCB
reflects as “debt” in its statistics while the individual parent-only
financials reflect these amounts in equity.

In any case we seem to be within a range that suggests that there
are not material differences between the total assets in the QCB data and the
parent-only financial report compiled data, and thus presumably in FA and FL.

Clearly, there are material differences
between the consolidated data and QCB’s due to QNB and CBQ as discussed above.

Let’s take a deeper look at the data
derived from consolidated financials and see if we can narrow the
difference.As noted above, two banks are
responsible for the difference: CBQ and QNB.

CBQ’s Turkish subsidiary
Alternatifbank (“ABank”) accounts for the difference between its consolidated
and parent-only financials. ABank’s 2016 TA were some USD 5 billion equivalent
and TL USD 4.6 billion equivalent.ABank’s 2016 IFRS financials have a credit risk note (page 29)
that provides a geographical allocation of assets: some 99% are domestic.Absent similar disclosure on liabilities,
we’re left in guestimate territory.No
useful detail on customer deposits or DTBs.There is some USD 1.6 billion in syndicated loans, sub-ordinated debt
(CBQ holds some USD 125 million) and “other borrowings” all to unspecified foreign
investors.

What about QNB?Here the gap between parent-only and
consolidated financials is some QAR 132 billion equivalent to USD 36 billion. Thus,
sharpening our focus on the NFA position of Qatari banks is largely a one bank
“issue” – QNB.

I’d expect that QNB’s
subsidiaries in Turkey, Egypt, and Indonesia are largely funded in country in
local currency to support in-country lending and investing activities.

If
that assumption is correct, that means a good portion of the “increased”
consolidated assets are offset by “increased” consolidated liabilities in the
same currency and obtained from banks and depositors in the country of
operation.

Further analysis of QNB’s subsidiaries (Turkey, Egypt, Indonesia,
Tunisia, etc.) could allow us to get closer to a “parent” only allocation of FA
and FL.As you might expect, since AA
doesn’t like to rely on learned assumptions even his own despite a fervently
imagined sterling track record, AA took a look at the 2016 financials for QNB Al Ahli Egypt (USD 10 billion), QNB Finansbank (USD 29 billion equivalent in
assets), and QNB Indonesia (USD 1.8 billion) assuming these are
the larger fish in QNB’s subsidiary pool.Sadly, there are no cross-border geographical allocation notes of any
use in their financials.

Looking at QNB Al Ahli’s 2016 annual report
it seems assets are primarily in Egypt. On the liability side, cross-border
liabilities appear modest, Due to Foreign Banks (DTFBs) equals USD 45 million
equivalent just around 47 bp (.0047) of Total Liabilities. 83% of these DTFBs are owed
to QNB Qatar.The only other foreign
liability is a EGY 3.9 billion (USD 218 million) loan from the EBRD representing
2.31% of TL.

Similarly QNB
Finansbank states that its business is primarily in Turkey with negligible
business in Bahrain.That’s borne out by
a May 2017 drawdown prospectus for its MTN program which shows that
foreign loans are not even 0.005 of total loans. Looking
at liabilities (TL = USD 26.2 billion equivalent) there’s no breakdown on DTBs
USD 3.3 billion equivalent (12.8% of TL).Of some USD 1.8 billion equivalent in Debt Securities Issued roughly USD
1 billion are Eurobonds.Of other
borrowings of USD 4.1 billion some USD0.6 billion was provided by QNB.

QNB
Indonesia really didn’t say much.Or if
they did, I missed it.

But note this is not conclusive.References to “business” focus on the asset
side of the balance sheet.Here we’re
also very concerned with cross-border funding.

Turning back to QNB Qatar’s 2016 financials,
note 40 describes the 2016 acquisition of Finansbank disclosing that TA
acquired were QAR 120 billion and TL assumed QAR 109 billion.If you look at Note 35 on geographical
allocation of assets and liabilities in QNB’s FYE 2016 annual report, you see
that these amounts primarily explain the change from FYE 2015 to FYE 2016 in
the “Europe” (!) region. (CBQ reflects
its Turkish subsidiary under Other MENA.)The aptly named “Other” region probably contains Egypt and Indonesia and
no doubt Syria, Iraq, and other subsidiaries.

What this suggests at least to AA is that we can refine the geographical
allocation quite easily by subtracting the TA and TL of each of these three
banks from their respective “regional” allocations.This then gives us a “close enough”
geographical allocation to enable us to make a judgment on parent-only
geographical exposure.

Is the number
100% accurate?No, but as argued above
it doesn’t need to be.

What we also have
at the end of this “exercise” are two sets of NFA.One consolidated and one estimated
parent-only that will enable us to construct various NFA scenarios. NP Let’s look at the results of that analysis,
starting with the unadjusted consolidated financials.

QNB
NFA by Region 31 Dec 2016

Consolidated
Financials

Billions
of QAR

REGION

FA

FL

NFA

OGCC

32.3

24.1

8.2

EUR

149.5

224.9

(75.4)

NorAm

12.3

3.8

8.5

Other

83.8

102.5

(18.7)

TOTAL

277.9

355.3

(77.4)

Qatar

418.7

265.8

152.9

TOTAL

696.6

621.1

75.5

Now
the adjusted financials.

QNB
NFA by Region 31 Dec 2016

Consolidated
Financials

Ex-
Turkey, Egypt, and Indonesia

Billions
of QAR

REGION

FA

FL

NFA

OGCC

32.3

24.1

8.2

EUR

40.5

115.9

(75.4)

NorAm

12.3

3.8

8.5

Other

43.6

62.5

(18.9)

TOTAL

128.7

206.3

(77.6)

Qatar

418.7

265.8

152.9

TOTAL

547.4

472.1

75.3

You’ll immediately notice that the NFA did not change significantly.That’s because the adjusting entries of FA
and FL are equal. I removed the TA of the subsidiaries from FA and then added
back the difference between TA and TL to reflect the estimated carrying
value of equity in the parent-only financials.On the FL side I removed the TL of the subsidiaries.

For Other (QNB Ahli Egypt) the entries are FA -38 + (38-34) and for FL -34.For Indonesia FA -7 +(7-6) and FL -6.

What
has happened though is that aggregate total of FA and of FL has reduced some
QAR 149 billion (USD 41 billion) from FA QAR 277.9 billion to QAR 128.7 and FL
QAR 355.3 billion to QAR 206.3 billion.

Also note that QNB's negative NFA position is concentrated in Europe and appears driven by international borrowings and capital market transactions which have staggered maturities so that absent events of default creditors only access to funds is secondary sales. That being said there are substantial maturities in 2018.

If you’ve been paying attention, I expect there are a few out there who
would like to ask AA to hold on a minute and explain how he made a QAR 149
billion adjustment between QNB’s consolidated and estimated parent-only
financials when the difference between the two sets of financials as shown
above is QAR 132 billion on the asset side and QAR 136 billion on the liability
side.

Good question.I don’t have a numerical analysis to back up
the assertion that this is due to transactions between subsidiaries and QNB the
parent that would be included in parent-only financials but eliminated in the
consolidated ones, plus perhaps some differences in the carrying value of
equity in subsidiaries on the parent-only balance sheet versus the FA-FL
methodology used by AA.